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In affirming that ruling, the District Court for the D.C. Circuit's decision has broad implications for healthcare providers across the nation, which now should reevaluate their status as federal subcontractors.

The U.S. District Court for the D.C. Circuit has ruled in UPMC Braddock v. Harris that three hospitals affiliated with the University of Pittsburgh Medical Center (UPMC) qualify as federal "subcontractors" because they provide medical services to an HMO that has a prime contract with the federal government. This March 30, 2013, ruling subjects the hospitals to coverage under the U.S. Department of Labor's (DOL's) Office of Federal Contract Compliance Programs (OFCCP), which mandates equal opportunity by federal contractors and subcontractors. In an earlier agency ruling, the DOL's Administrative Review Board (ARB) had determined that the hospitals qualified as subcontractors. In affirming that ruling, the court's decision has broad implications for healthcare providers across the nation, which now should reevaluate their status as federal subcontractors.

The OFCCP administers the equal opportunity requirements of three federal authorities that prohibit federal contractors and subcontractors from discriminating based on race, color, religion, sex, national origin, disability and veteran status. The OFCCP's regulations deem qualifying entities to include certain "equal opportunity clauses" in their federal contracts and subcontracts by operation of law, regardless of whether such clauses actually exist in their contracts. Moreover, the OFCCP requires covered entities to, among other things, develop and administer affirmative action plans. OFCCP audits can subject entities to costly penalties for noncompliance.

The OFCCP regulations provide two methods for qualifying as federal "subcontractors." Covered subcontractors are those who have entered into "subcontracts" with a person either (1) "[f]or the purchase, sale or use of personal property or nonpersonal services which, in whole or in part, is necessary to the performance of one or more [prime] contracts; or (2) [u]nder which any portion of the [prime] contractor's obligation under any one or more contracts is performed, undertaken or assumed."

In UPMC Braddock, the hospitals contracted with an HMO, the UPMC Health Plan, to provide medical services to federal employees enrolled in the HMO's Health Plan. When the federal employees receive medical treatment at one of the hospitals, the hospital bills the Health Plan according to the terms outlined in their agreement. While it was apparent that the UPMC Health Plan qualified as a federal contractor, the UPMC hospitals assumed that they did not qualify as federal "subcontractors."

The court rejected each of the hospitals' arguments for exemption from OFCCP regulations.

Contract Language Does Not Determine OFCCP Coverage

First, the hospitals pointed to language in their contract with the HMO, which excluded the hospitals from coverage as UPMC Health Plan subcontractors. As the court ruled, the OFCCP's definition of subcontractor controls, and an entity meeting that definition cannot escape its obligations under the OFCCP merely by pointing to contrary language in its agreement with a federal contractor.

Hospitals Provide Covered "Nonpersonal" Services to HMO

Next, the hospitals assumed that they did not meet the OFCCP's definition of subcontractors because they did not provide "nonpersonal" services to the HMO. The hospitals interpreted the phrase nonpersonal services to exclude "personal" services, such as performing a colonoscopy on a federal employee. While the OFCCP regulations do not define nonpersonal services with respect to covered "subcontracts," the court interpreted the phrase by analogy to a similar definition of subcontract in the Federal Acquisition Regulations (FAR). The FAR regulations provide that a "personal services contract" is "characterized by the employer-employee relationship it creates between the Government and the contractor's personnel." The court thus concluded that coverage for nonpersonal services in the OFCCP regulations refers to the relationship between the subcontractor's personnel and the federal contractor, rather than to the nature of the services provided by the subcontractor's employees to those benefiting from the subcontract. Because the hospital personnel were not employees of the UPMC Health Plan, the federal contractor, the hospitals did not provide exempt personal services to a federal contractor, but rather provided covered nonpersonal services to the HMO. As the court explained, it would be nonsensical for the OFCCP to exclude doctors and nurses, but not insurance company employees and construction workers, merely based on who provides personal services, as that phrase is commonly understood.

The hospitals assumed that they did not meet either definition of an OFCCP subcontractor. First, the hospitals contended that the medical services they provided to the HMO were not necessary to the HMO's performance of its contract with the federal government. Next, the hospitals argued that they did not perform, undertake or assume any "portion" of the HMO's prime federal contract. The hospitals relied on a 2009 ARB decision, OFCCP v. Bridgeport Hospital, which seemed to provide a broad exemption for healthcare entities who provide only medical treatment to government employees. In Bridgeport Hospital, the ARB concluded that because a hospital agreed to provide only health insurance, rather than healthcare, to a federal contractor HMO, it was exempt from OFCCP regulations. The hospitals in UPMC Braddock argued that the UPMC Health Plan, as the federal contractor, contracted with the government only to provide health insurance coverage, not healthcare services, to the federal employees enrolled in the plan. The court disagreed, finding that the health plan contracted to provide both health insurance and healthcare services to the federal government. Because the HMO depended on the hospitals to provide medical services that were "necessary" for the HMO to meet its obligations to the federal government, and because the hospitals contracted to "perform" a portion of the medical care that HMO was obligated to provide, the hospitals met both definitions of subcontractor.

No Consent Needed to Bind Hospitals to OFCCP Obligations

Finally, the court rejected the hospitals' argument that they never consented to be bound by the equal opportunity clauses that the OFCCP's regulations require to be included in covered federal contracts and subcontracts. Because the OFCCP's equal opportunity clauses are deemed to apply to covered federal entities by operation of federal law—not contract law—consent is not necessary to bind qualifying subcontractors to OFCCP obligations.

What Does This Mean for Employers?

To ensure compliance with OFCCP regulations, healthcare providers may want to reconsider their coverage as federal subcontractors under the OFCCP. The District Court for the D.C. Circuit's ruling clarifies that it is the nature of the entity's relationship with a federal contractor, not the nature of the services provided to it, or the particular contract terms in an entity's agreement with a federal contractor, that determines coverage. Where questions arise regarding subcontractor status, healthcare providers may wish to consult with legal counsel to determine the steps to take in navigating the OFCCP’s broad compliance landscape.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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